From the TUC

Time to bring forward uprating of pensions in line with earnings

01 Jan 2009, by in Economics, Pensions & Investment

Over time earnings tend to go up more than prices. This is why our standard of living rises from generation to generation (although technological advance has something to do with this too.)

So when the Conservatives decided in 1980 that they would only uprate the state pension in line with prices  it meant that pensioners would no longer share in rising prosperity. In most years pensions have fallen a little behind earnings – and over time that mounts up. Today the state retirement pension is below what people need to live on – and anyone dependent on it alone would almost certainly qualify for means tested benefits on top.

It has therefore been a long time demand from pensioners that the link be restored. It was even Conservative policy at the last election. Lord Turner’s Pensions Commission also recommended change as they rightly saw the ever growing proportion of pensioners projected to be eligible for means-tested benefits as destabilising the wider pensions system.

The government listened. The 2007 Pensions Act gives them the power to index pensions in line with earnings, but so far ministers have indicated that the earliest this will happen is 2012.

But they need to look again at this date.

Until recently it would not have made much difference. Although over time earnings do go up more than prices, it does not happen every year. Recently there has not been a huge difference between earnings and prices. And sometimes you get the odd statistical blip – such as when the pension went up by just 75p because of a particularly small increase in RPI in the September figure (on which the subsequent April increase is based). This was very politically damaging.

But there is nothing normal about the economy at the moment. Pensioners will in fact do better than for some time next April because the inflationary blip was around its peak in September with RPI at 5 per cent – definitely above earnings for once.

Yet by next September it will be completely different. Many expect price inflation to collapse rapidly, and some even see deflation – negative RPI – as possible. Frankly I don’t know what would happen to benefits linked to prices in such circumstances, but let us hope that the law will not require cuts in benefits too.

But what we can see is that if they are linked to prices pensions are likely to increase by only a derisory amount – if at all – in April 2010.

Earnings are hardly going to take off next year in the midst of rapidly rising unemployment, but in recent recessions they have tended to keep on rising in real terms, if only modestly.

Ministers would be well advised to use the powers they already have to announce that their 2012 pledge will be brought forward by two years. Otherwise the 75p fiasco will be due for a similarly politically damaging replay in 2010.